The guidance includes a refresher on “failing firm” defence claims, for which the CMA will maintain a high bar.
On 22 April 2020 the UK’s Competition and Markets Authority (CMA) published guidance on its assessment of mergers during the COVID-19 pandemic. This follows the guidance the CMA issued on 18 March 2020 regarding its working arrangements during the pandemic.
The new guidance is welcome as a clear statement that it is business as usual in terms of the ability of parties to notify mergers and engage with the CMA, but that the CMA is ready to adapt within the framework of its existing rules to the particularities of the present crisis.
Key takeaways for merging parties include:
- While the CMA will try to mitigate the risk of delay, parties should prepare for a prolonged pre-notification process if engagement with third parties becomes difficult for the CMA.
- There will be no relaxation of the substantive competition law standards by which the CMA will assess mergers, including its high bar to accepting “failing firm” arguments.
- Early engagement with the CMA is encouraged (and compelling supporting evidence is a must) if parties intend to raise a failing firm defence.
Merger control procedure during the pandemic
The UK merger regime, at least for now, is operating slightly differently to a number of merger control regimes around the world which are either encouraging parties to delay notification or introducing statutory extensions to review periods (see Latham’s regularly updated briefing Impact of COVID-19 on Global Merger Control Reviews).
The CMA confirms that it remains bound by the same statutory duties and deadlines. This includes a duty to refer for a Phase II investigation any merger meeting the applicable jurisdictional thresholds that the CMA believes has or may be expected to result in a substantial lessening of competition in a UK market. Key statutory deadlines include the four-month period available to the CMA to call a transaction in for review post-closing, and the 40 working day period for the CMA to carry out its Phase I investigation.
The four-month post-completion call-in period is a distinguishing feature of the UK’s voluntary merger control regime. According to the guidance this feature is the reason the CMA is not asking merging parties to delay merger notification. The ability to notify the CMA of a transaction is an important tool for merging parties to obtain the legal certainty that they will not face the disruption of seeing their transaction called in post-completion.
However, the CMA points to a number of elements of its procedure that it may adapt to address difficulties posed by the pandemic:
- Information-gathering: The CMA acknowledges that some businesses (whether merging parties or third parties responding to information requests) may struggle to respond to information requests. As such, it states that substantiated claims that a business is facing difficulties brought about by COVID-19 will generally constitute a reasonable excuse for not providing certain information by a specified deadline in response to a statutory information request. In such instances, the CMA may “stop the clock”.
- Timing of investigations: While the applicable statutory deadlines remain in place, the CMA recognises that COVID-19 presents challenges to the expedient running of investigations. The CMA notes that the pre-notification process will take longer than usual due to difficulties in obtaining information from the merging parties and third parties. In particular, the CMA may not be able to start the 40-working-day clock if third parties are unable to meaningfully engage with the CMA’s investigation. The CMA will take steps when possible to mitigate any delays in third-party engagement, for example by publishing Invitations to Comment during the pre-notification process. However, delays caused by third parties could prove frustrating for merging parties seeking a timely clearance decision.
- Meetings and hearings: All CMA meetings and hearings are being conducted remotely via videoconferencing or telephone. Site visits will not take place. The CMA will arrange an alternative opportunity to gain a greater understanding of the parties’ businesses and remotely meet key operational staff.
- Interim measures: The CMA is able to impose interim measures to preserve the pre-merger competitive structure of the market. Its guidance indicates that despite having received a high volume of requests from merging parties for changes to interim measures for completed mergers, the CMA is unlikely to lift those already in place and will continue to impose interim measures as usual. However, the CMA confirms that derogations from measures that are in place can be granted rapidly when merging parties demonstrate that they are needed to ensure the viability of their businesses. The CMA encourages merging parties to engage with the relevant case team as early as possible after they conclude that such derogations may be necessary.
The CMA’s substantive assessment of mergers during the pandemic and “failing firm” arguments
Unsurprisingly, the CMA confirms that the pandemic has not brought about any relaxation of its investigational standards or the standards by which mergers are assessed (a sentiment echoed by EU antitrust chief Margrethe Vestager in a statement on 24 April 2020). The CMA explains that its merger investigations typically look beyond the short-term to the lasting impact of a merger on markets, and so even significant short-term economic shocks may be insufficient to override these long-term competition concerns. The CMA says its decisions are based on evidence and not speculation, and it will carefully consider the available evidence in relation to the possible impacts of COVID-19 on competition in each case.
More specifically, the CMA includes as an annex to its guidance what it calls a “refresher” on submissions that firms involved in mergers are failing financially and would have exited the market absent the merger in question (the so-called failing firm defence). The term “refresher” is accurately deployed as the annex merely restates the CMA’s existing approach, emphasising the stringent nature of the three-limb test that the CMA applies to such arguments and the need for parties to present compelling evidence. The test can be summarised as follows:
- Would the firm have exited (through failure or otherwise) absent the transaction?
- Would there have been an alternative purchaser for the firm or its assets?
- What would the impact of exit be on competition compared to the competitive outcome that would arise from the acquisition?
The CMA advises merging parties to make clear early on if they will be seeking to present a failing firm argument, and the CMA may be willing to give informal advice.
The timing of the guidance is interesting, in that it comes five days after the CMA announced that it had provisionally cleared an investment by Amazon in Deliveroo, which had been subject to an in-depth Phase II review by the CMA. In a rare move, the CMA has provisionally held that Deliveroo’s exit from the market would be inevitable without access to the investment that the CMA found only Amazon would be willing and able to provide during the pandemic. In this context, the CMA concluded that Deliveroo’s exit would be worse for competition than allowing the Amazon investment to proceed. The subsequent guidance may well be an attempt by the CMA to warn merging parties not to expect a softening in its approach to this test.
Versions of the failing firm defence are established in a number of jurisdictions around the world, and merging parties may nevertheless be looking to the CMA’s provisional findings in Amazon/Deliveroo for inspiration to run their own defences. While the CMA may be the first major competition authority to accept such arguments during the present crisis, other regulators are certainly taking into account the impact of the pandemic on market conditions when assessing mergers. For example, a recent European Commission information request relating to a proposed airline merger reportedly asks competitors to comment on the market from two perspectives: the situation absent the pandemic and the situation in which the pandemic is currently resulting in their operations being grounded.
In this context, while global competition authorities may not be relaxing their standard of review of mergers, it is inevitable that the pandemic will have an impact on the outcome of present and future reviews.